INTER-STATE  COMITY  AND  DOUBLE 
TAXATION 


\ 


An  Address  Before  the  Second  State  Conference  on  Taxation, 
Buffalo,  N.  Y.,  January  9-11,  1912. 


By  David  Rumsey, 

Former  Assistant  Corporation  Counsel  City  of  New  York, 
Vice-President  Continental  Insurance  Company . 


ALBANY,  N.  Y. 

J.  B.  LYON  COMPANY,  PRINTERS 
1913 


w,THTH,coK^iK5«-rsorr«. 


INTER-STATE  COMITY  AND  DOUBLE 
TAXATION 

By  David  Rumsey 

Former  Assistant  Corporation  Counsel , City  of  New  YorJc , 
Vice-President  Continental  Insurance  Company 

No  doubt  there  is  a touch  of  cynicism  in  the  suggestion, 
but  the  statement  seems  warranted  that  the  standard  of  mor- 
ality of  the  community  is  lower  than  that  of  the  individuals 
who  compose  it.  Lives  have  been  sacrificed  and  the  privi- 
leges of  liberty  violated,  when  a supposed  national  honor 
could  be  invoked,  as  a veil  to  hide  a national  expediency. 
The  perception  of  the  right  of  property  frequently  acted 
upon  by  communities  of  men  has  been  that  the  alien’s  right 
to  his  possessions  was  measured  by  his  strength  to  retain 
them. 

With  the  progress  of  civilization  men  and  nations  have 
raised  the  standard  of  their  morality  but  it  is  true  to-day 
-As  it  has  been  in  the  past,  that  national  morality  is  below  that 
of  the  people  who  constitute  the  nation,  and  this  statement 
will  probably  remain  true  to  the  end  of  time. 

For  those  who  doubt  the  validity  of  this  assertion,  it  may 
be  well  to  point  the  reasons  upon  which  it  is  founded.  The 
code  of  morality  for  the  individual  is  established  by  his  re- 
ligion and  his  law.  The  precepts  are  definite  and  their  vio- 
lation is  followed  by  the  bailiff,  the  prison  and  the  stigma  of 
popular  reprobation.  The  ten  commandments  and  the  bill 
7 of  rights  are  vital  forces,  and  he  who  ignores  them  finds  him- 
^ self  isolated,  with  none  to  defend  him,  and  opposed  to  the 
solid  front  and  unyielding  antagonism  of  his  fellow  men. 
The  same  forces  do  not  act  upon  nations.  Neither  the  fear 
of  punishment  nor  of  adverse  public  sentiment  has  been  a 
factor  m their  education  toward  an  uplifting  of  the  national 
morality. . The  responsibility  for  national  acts  of  injustice  is 
usually  divided  among  many  individuals  and  focused  upon 


2 


none.  Resentment  of  such  acts  comes  from  another  people. 
The  benefited  community  remains  complacent  and  forgiving, 
with  pride  in  the  enterprise  of  their  government,  with  satis- 
faction at  the  gain  or  benefit  to  themselves,  but  with  ears 
that  are  deaf  to  the  complaints  of  an  alien  community  claim- 
ing to  have  been  ill-treated.  Men,  from  inclination  or  com- 
pulsion, are  just.  Rations  are  expedient. 

When  the  thirteen  States  that  had,  with  difficulty,  been 
held  together  by  the  necessities  of  a common  danger  emerged 
from  the  war  of  the  revolution,  their  national  jealousies  re- 
vived and  it  required  the  work  of  patient,  brilliant  states- 
men, assisted  by  the  recollection  of  weakness  against  a com- 
mon enemy,  to  reconcile  the  jarring  interests  into  sufficient 
harmony  so  that  a union  could  be  established.  But  the  work 
was  done.  The  constitution  was  adopted.  Its  adequacy  has 
been  proven  by  the  test  of  time.  Under  it  we  are  a nation  as 
against  the  world,  for  the  word  of  the  united  government  is 
law  to  the  States  in  war  and  in  diplomacy.  We  are  a nation 
as  to  commerce,  for  the  assumption  by  the  national  govern- 
ment of  control  of  interstate  commerce  has  practically  com- 
passed all  commerce.  But  for  taxation  the  States  remain 
where  they  were  in  1780,  jealous,  warring  and  independent. 
By  the  constitution,  the  States  surrendered  power  to  tax  ' 
imports,  commerce  and  the  instrumentalities  of  the  federal 
government.  Otherwise,  they  remain  free.  Later,  when 
the  principles  of  Magna  Charta  were  incorporated  into  the 
constitution  the  States  were  prohibited  from  using  the  power 
of  taxation  to  confiscate.  Subject  to  these  exceptions,  each 
State  may  lay  its  iron  hand  upon  all  men  and  all  things 
with  its  jurisdiction. 

This  proposition  no  doubt  seems  eminently  fair  and 
proper.  The  State  may  tax  that  which  is  subject  to  its 
jurisdiction. 

It  is  natural  that  such  a statement  should  be  accepted  as 
valid  in  economics  as  it  is  in  law.  But  those  who  accede  to 
it  as  expressing  a fair  rule  for  adjusting,  as  between  the 
* States,  the  burden  of  taxation,  fail  to  appreciate  that  a tax 
is  a taking  of  value;  that  the  State  where  the  value  is  situ- 


3 


ated  is  the  only  jurisdiction  that  can  justly  tax  it,  and  as  a 
sound  legal  proposition,  jurisdiction  to  tax  the  value  fre- 
quently exists  where  the  State  has  power  to  coerce  payment 
but  where  the  value  on  which  the  tax  is  computed  is  beyond 
the  State’s  control. 

The  difficulty  of  the  situation  lies  in  this  fact  that  on  the 
one  hand  the  only  sound  method  of  apportioning  property 
taxes  and  taxes  on  persons  or  privileges  measured  as  to 
amount  by  property,  is  to  find  where  the  value  lies  and  to 
recognize  that  the  same  value  cannot  support  two  taxes ; and, 
on  the  other  hand,  a single  value  may  have  engrafted  upon  it 
$many  property  rights  and  recognized  legal  interests  existing 
in  many  places  and  in  various  ownerships,  each  one  of  which 
may  serve  as  a foundation  for  legal  jurisdiction  and  thus 
burden  the  same  value  with  a levy  of  many  taxes. 

Many  instances  may  he  referred  to  as  illustrative.  The 
jurisdiction  of  the  domicile  of  a person  lays  hold  of  the  con- 
trol of  the  person  to,  enforce  personal  taxes  measured  by  the 
value  of  his  property.  The  jurisdiction  where  many  kinds 
of  personal  property  may  he  situated  claim  successfully  that 
the  situs  of  the  property  gives  jurisdiction  regardless  of  the 
domicile  of  the  owner.  There  is  here  a grave  chance  for 
conflict  of  jurisdiction  and  double  taxation.  Again,  money 
or  property  is  loaned  by  one  person  to  another.  The  State 
in  which  the  creditor  resides  claims,  with  considerable  jus- 
tice, that  the  value  which  the  loan  represents  exists  as  be- 
longing to  the  creditor ; it  is  an  asset  in  his  hands  and  he  is 
liable  to  taxation  for  it.  But  the  State  where  the  debtor 
lives,  with  some  plausibility,  argues  that  the  claim  is  of 
value  only  as  it  can  he  enforced  and  the  creditor  can  enforce 
it  only  by  invoking  the  laws  of  that  State  to  compel  payment, 
therefore  the  value  exists  in  the  State  where  the  debtor  re- 
sides. Both  of  these  theories  may  he  safely  acted  upon  by 
any  State  without  fear  that  a statute  for  taxation  will  he 
held  to  violate  constitutional  limitations  and  it  is  thus  true, 
as  a practical  matter,  that  control  either  of  a creditor  or  a 
debtor  gives  to  a government  the  power  of  coercion  to  en- 
force payment  of  the  tax.  The  case  is  that  of  a single  value 


4 


subject  to  the  taxing  jurisdiction  of  two  states.  Perhaps  the 
most  complex  multiplication  of  the  power  of  taxation  upon  a 
single  value  is  to  he  found  in  the  case  of  a business  corpora- 
tion, because  of  the  artificiality  of  the  divisions  of  ownership 
which  are  usually  involved.  A business  plant  exists  consist- 
ing of  the  real  and  personal  property  of  a factory  for  manu- 
facturing a product,  business  good  will  or  franchise  and  the 
accounts  due  from  customers  for  sales  of  the  product.  The 
ownership  of  the  corporation  is  represented  by  shares  of  stock 
distributed  among  residents  of  different  taxing  jurisdictions 
and  a part  of  the  funds  with  which  the  corporate  plant  was 
purchased  is  represented  by  bonds  also  widely  distributed 
and  held  by  the  citizens  of  different  States.  In  this  case 
the  value  is  the  worth  of  the  property  of  the  corporation  and 
that  ">nly.  That  value  is  the  limit  of  just  taxation.  Yet 
the  issue  of  various  classes  of  securities  against  that  value 
serves  as  a foundation  for  multiple  taxation.  The  corpora- 
tion may  be  taxed  upon  its  real  and  personal  property  in- 
cluding its  franchises.  The  shareholders  may  be  taxed  upon 
the  value  of  their  shares.  The  bonds  may  be  taxed  as  credits 
in  the  ownership  of  the  bondholders  and  they  may  even  be 
treated  for  taxation  as  a kind  of  tangible  property,  which  is 
capable  of  passing  by  delivery  like  money  or  commercial 
paper,  and,  therefore,  capable  of  having  a situs  for  taxation, 
at  the  place  where  they  are  situated,  regardless  of  the  domi- 
cile of  the  owner.  It  is  also  an  elementary  rule  of  law  that 
the  deduction  of  indebtedness  is  a privilege  which  may  be 
granted  or  withheld  in  the  discretion  of  the  taxing  power. 
The  State  may  thus  tax  the  property,  the  stock  and  the  bonds 
and  may  compel  payment  of  taxes  from  the  corporation  and 
the  holders  of  its  securities  without  giving  credit  for  indebt- 
edness incurred  in  acquiring  title  to  the  thing  taxed  and  then 
may  tax  the  debt  as  a part  of  the  assets  of  the  creditor.  In 
other  words,  every  artificially  created  interest  in  property 
may  be  treated  as  property  for  taxation  and  thus  a single 
value  is  made  to  bear  many  times  its  fair  share  of  the  burden 
of  taxation. 

Another  example  of  multiple  taxation,  sanctioned  by  valid 
legal  principles  but  operating  as  an  unjust  and  unscientific 


5 


discrimination  is  the  taxation  of  real  property  and  also  mort- 
gage debts,  which,  in  fact,  must  be  satisfied  out  of  the  value 
of  the  property  upon  which  the  mortgage  is  a lien.  The 
logic  of  the  legal  theory  which  permits  this  is  unassailable. 
In  case  of  a mortgage  the  real  property  is  collateral  security 
only;  the  mortgage  represents  a transfer  of  money  from  the 
creditor  to  the'  debtor  and  presumably  this  money  will  be 
repaid  without  involving  the  real  property  but  leaving  the 
collateral  untouched  and  the  value  of  the  real  property  un- 
affected by  the  debt.  But  usually  the  fact  differs  from  the 
legal  presumption.  The  money  borrowed  is  used  as  a part 
payment  for  the  real  property  or  increases  the  value  of  the 
collateral  because  it  is  used  in  payment  for  improvements. 
Thus  the  debtor  does  not,  as  in  the  case  of  an  ordinary  loan 
of  money,  retain  a fund  belonging  to  the  creditor  consisting 
of  personal  taxable  property  against  which  an  offset  of  in- 
debtedness may  be  allowed,  which  adjusts  the  account  fairly 
and  independently  of  the  real  estate  pledged  as  collateral. 
On  the  contrary,  the  usual  mortgage  transaction  consists  of 
lending  the  money  to  the  mortgaged  real  property  rather  than 
to  its  owner  and  the  parties  to  the  transaction  expect  the  real 
property,  not  the  owner,  to  pay  the  interest  and  liquidate  the 
debt.  The  loan  is  not  in  fact  made  upon  the  credit  of  the 
borrower  nor  would  that  consideration  be  sufficient  in  case 
of  a loan  which  continues  regardless  of  changes  in  the  bor- 
rower’s financial  condition,  which  matures  at  a remote  time 
and  is  in  form  such  that  the  borrower’s  personal  estate  can 
be  held  for  the  debt  only  secondarily  to  the  liability  upon 
the  property  and  only  to  the  extent  that  the  property  fails  to 
realize  sufficient  value  to  pay  the  debt  in  full.  It  seems 
strange  that  the  law  of  taxation  fails  to  accord  with  the  fact 
and  substance  of  so  ordinary  a transaction. 

One  of  the  most  iniquitous  of  the  modern  methods  of  taxa- 
tion, founded  upon  jealousy  or  greed  and  operating  as  a hos- 
tile discrimination  against  the  people  of  other  States,  is  the 
system  of  using  the  power  to  exclude  nonresidents  or  to  im- 
pose conditions  upon  their  doing  business  within  a State  in 
order  to  draw  within  the  jurisdiction  property  which  other- 
wise would  be  wholly  beyond  the  power  of  the  State  to  tax 


If  we  have  the  eyes  to  see  and  the  honesty  to  appreciate, 
we  will  acknowledge  that  the  business  of  the  people  of  this 
country  is  either  done  in  corporate  form  or  directly  depend- 
ent upon  the  existence  of  corporations.  This  is  by  no  means 
confined  to  the  larger  enterprises,  which  may  or  may  not 
have  become  a proper  subject  of  disapprobation,  hut  it  is 
true  of  the  small  businesses  in  which  a few  or  even  a single 
individual  may  be  engaged.  A franchise  to  be  a corporation 
has  for  years  been  almost  as  free  as  the  air  we  breathe  and 
could  be  had  from  any  state  for  a nominal  fee  and  otherwise 
merely  for  the  asking.  The  immense  advantages  of  conduct- 
ing business  in  corporate  form  have  been  recognized  gener- 
ally and  the  privilege  has  been  availed  of  by  large  and  small 
alike  — in  fact,  by  almost  all  people  who  had  business  to 
conduct  if  any  capital  was  needed  in  the  undertaking.  But 
whenever  a corporate  form  has  been  assumed  the  business  has 
lost  the  protection  it  would  have  had  if  conducted  by  an  indi- 
vidual. A corporation  has  no  citizenship,  and  any  state  may 
exclude  from  its  territory  a corporation  existing  by  the  daw 
of  another  state.  The  power  to  exclude  carries  with  it  the 
power  to  impose  conditions  of  admission  and  these  conditions 
take  the  form  of  requirements  to  pay  licenses  or  taxes  meas- 
ured by  the  whim  of  the  government  which  imposes  them. 
In  this  era  of  quick  communication  and  transportation  busi- 
ness cannot  confine  itself  within  the  narrow  limits  of  a state. 
Merchandise  is  bought  and  sold,  trade  is  extended  without 
thought  of  the  artificial  state  boundaries  over  which  the  rail- 
roads and  the  telegraph  pass  unhindered.  The  result  is  that 
the  business  of  the  people  of  each  State  is  being  carried 
into  many  other  States  and  this  condition  is  economically 
normal  and  profitable  to  the  country.  It  creates,  however, 
an  opportunity  for  oppression  under  the  guise  of  taxation 
which  is  discriminatory  and  in  many  cases  intolerable.  Each 
State  has  power  to  impose  such  tax  burdens  as  it  pleases,  and 
the  taxes  need  not  be  uniform  nor  in  fair  comparison  with 
the  taxes  upon  residents,  nor  need  they  bear  any  relation  to 
the  benefit  given  by  the  government  which  exacts  them.  The 
only  limit  is  the  natural  one  that  if  the  burden  becomes  too 


7 


intolerable  tbe  non-resident  corporation  will  withdraw  from 
the  State  and  cease  to  do  business  there.  But  there  is  a wide 
field  for  discrimination  and  unfairness  — a wide  opportu- 
nity for  oppression  before  this  limit  of  endurance  is  reached, 
and  we  have  to-day  in  this  country  the  spectacle  of  each  State 
piling  upon  the  business  industries  of  every  other  state  a 
weight  of  license  fees  and  taxes  unrestrained  by  principles  of 
equity  or  uniformity.  And  each  State  in  turn  is  goaded  to 
greater  excess  in  burdening  the  business  of  so-called  “ foreign 
corporations  ” by  the  fact  that  other  States  are  correspond- 
ingly unfair  to  its  own  industries.  It  is  curious  that  in  this 
manner  the  natural  principles  and  restraints  of  fair  taxa- 
tion should  so  far  have  broken  down,  but  the  fact  exists,  and 
the  resulting  evil  is  a grave  condition  to  be  reckoned  with  in 
our  future  economic  development. 

It  must  be  acknowledged  that  the  question  of  what  is  the 
ideal  theory  of  apportioning  the  burdens  of  government  upon 
persons  and  property  is  a question  involving  a wide  range  of 
discussion  and  diversity  of  opinion.  It  presents  a subject 
for  economists  and  statesmen  to  deal  with  and  the  govern- 
ments of  the  various  States  may  properly  solve  the  problem 
for  themselves  in  the  light  of  local  conditions,  the  temper  of 
their  people,  the  character  of  the  property  and  the  industries 
within  their  borders.  Ho  inflexible  rule  of  taxation  can  be 
dictated  to  the  States  of  this  Union  either  by  constitutional 
amendment  or  by  an  appeal  to  the  doctrine  of  comity.  It 
must  be  expected  that  the  States  will  continue  to  trade  upon 
the  superiority  of  natural  advantages  and  to  exercise  the  full 
power  of  their  jurisdiction  to  impose  a minimum  of  burden 
on  their  citizens  without  overmuch  concern  for  the  people  of 
other  States  who  fall  within  the  burdens  of  their  power  or  are 
indirectly  injured  by  the  methods  of  taxation  which  they 
establish. 

But  there  are  certain  underlying  axioms  of  fair  taxation 
which  can  be  phrased  with  sufficient  accuracy  to  compel  a 
general  acquiescence,  and  a strong  appeal  can  be  made  to  the 
states  to  conform  to  those  rules  in  deference  to  a fair  treat- 
ment of  their  neighbors.  The  weakness  of  this  appeal  is  that 
it  cannot  be  enforced  by  law.  The  strength  of  it  lies  in  the 


8 


fact  that  the  States  of  this  country  are  learning  to  be  gener- 
ous friends  and  there  is  a quality  in  the  character  of  the 
people  which  insist  on  modifying  local  rivalry  to  the  extent 
which  is  rendered  necessary  by  the  principles  of  fair  play. 

When  taxes  are  upon  property  and  measured  by  the  value 
of  the  property;  it  is  not  fair  that  the  same  value  should  he 
taxed  more  than  once  for  the  same  taxing  period. 

It  is  no  answer  to  say  that  the  laws  violating  this  principle 
are  constitutional  exercises  of  jurisdiction  or  that  the  one 
state  is  not  responsible  to  the  other. 

Where  taxes  are  upon  inheritance;  it  is  not  fair  that  the 
value  of  the  estate  should  have  taxes  multiplied  upon  it  by 
the  laws  of  different  jurisdictions  and  it  is  as  wrong  that  this 
should  he  done  by  indirection  or  by  invoking  the  rule  that 
no  State  is  exceeding  its  jurisdiction,  as  it  would  be  if  two 
or  more  States  deliberately  combined  to  impose  a double  tax 
on  some  estates  and  a single  tax  on  others  of  the  same  value. 
When  licenses  are  established  for  the  privileges  of  doing  busi- 
ness or  exercising  franchises  the  fees  payable  should  be  meas- 
ured by  the  value  of  the  privileges  granted  but  the  power  to 
exclude  should  not  be  used  to  draw  within  the  taxing  power 
of  a State  property  which  naturally  is  taxable  elsewhere. 

These  principles  are  founded  upon  honest  dealing.  The 
people  of  each  State  have  a right  to  insist  that  the  various 
governments  which  may  hold  their  property  in  equal  control 
shall  agree  as  to  where  the  value  lies,  to  the  end  that  no 
property  shall  be  twice  taxed. 


